Is every cryptocurrency a pump-and-dump scheme? This question resonates with many, observing a familiar pattern whenever a token debuts on a new exchange: a rapid surge to unsustainable heights followed by a predictable crash, leaving investors stranded.
Who orchestrates these maneuvers? The answer lies with market makers — firms engaged by crypto projects to manage initial trading liquidity when tokens are listed on exchanges.
In the realm of crypto, primary listings mark the transition from private to public trading, akin to IPOs in traditional markets. However, unlike IPOs where initial prices are often set by investment banks, crypto assets frequently debut at deliberately lower prices, leading to inflated early gains.
During a primary listing, market makers (MMs) secure a significant portion of a token’s circulating supply, offering it for sale on the exchange’s pre-market order book. This placement ensures adequate liquidity for fair price discovery at the market’s opening.
Yet, some MMs exploit this process for short-term gains, employing tactics known as “parasitic” market making. These MMs artificially limit supply, manipulate sentiment, and profit from inflated demand before swiftly exiting the market. Such practices damage both token value and community trust.
Conversely, symbiotic market makers strategically balance the pre-market order book, fostering long-term value and enabling accurate price discovery. They provide liquidity on both sides, supporting a stable market entry for the token.
To categorize these approaches, we analyzed data from 93 listings across major platforms like Bybit, Kucoin, and Binance using the Relative Change in Volatility (RCV). This metric reveals how well MMs manage initial liquidity: parasitic approaches often lead to volatile swings, while symbiotic strategies promote stability and fair pricing.
Our findings highlight a concerning trend: nearly 70% of primary listings exhibit parasitic behaviors, disrupting fair price discovery and harming market integrity. In contrast, only about 21.5% adopt a symbiotic approach, which fosters sustainable market engagement.
As the digital asset market matures, addressing these issues becomes crucial. Asset issuers and exchanges must scrutinize MM practices using tools like RCV to ensure fairer, more transparent market entries. It’s time to hold market makers accountable and elevate standards for efficient price discovery.
Wesley Pryor, a seasoned consultant in blockchain and finance, underscores the importance of rectifying these practices. His insights advocate for transparency and responsible market conduct, essential as the industry evolves.
This article serves as a guide, offering insights into market dynamics without constituting legal or investment advice. The opinions expressed are solely those of the author and do not necessarily reflect the views of Cointelegraph.